These include overhead expenses that vary according to output, but not proportionately. So these costs are partly fixed and partly variable. Examples of semi-variable costs are normal repairs and maintenance of building and plant, salary of supervisors, chargemen, foremen etc., service department expenses, depreciation of plant and machinery etc. To take a concrete example, let us consider the element ‘repairs’. Normal repair is mostly fixed in nature, because within certain degree of capacity utilisation normal repair is a routine matter at regular intervals. When utilisation is beyond that certain degree, more frequent repairs shall be necessary involving further cost but still, such increase in cost shall not be proportionate to the increase in output.
Figure.3. Graph showing the Fixed and Variable Cost
The diagram is showing the respective areas of fixed and variable cost as per the levels of production.
In the case of Buccaneers Ltd., the costs are classified in accordance to the production expenses. They are elaborated below:
Total Direct Material = £ (450 + 100 + 50) = £ 600
Total Direct Labour = £ (180 + 120 + 75) = £ 375
Total Indirect Material = £ (40 + 30 + 10 + 10) = £ 90
Total Indirect Labour = £ (80 + 70 + 60 + 60) = £ 270
a. Direct expenses – Direct expenses are the expenses other than of the nature of material or labour and can be identified with or directly allocable to a particular cost centre or cost object.
b. Indirect expenses – Indirect expenses are the expenses other than of the nature of material or labour and cannot be directly allocable to a particular cost centre.
An organisation can develop different costing methods to synchronise the nature of activity. These methods are discussed below:
Service and Operation Costing – Here, instead of the process, each operation is taken as the cost centre. In industries where the production is carried out by a number of distinctive operations, operation costing is suitably used. If in the manufacture of a particular product there are four distinct operations and the operation unit costs are a, b, c and d, the cost of the finished unit is determined by a+b+c+d.
Job Costing – Under this method, the cost unit is taken to be a job, small or big, comprising of a definite quantity of a product manufactured. So the approach is a product approach. This system is used where it is desired to ascertain the cost of a job or a specific order or of a batch of finished goods and also profit or loss on each such job.
Batch Costing – Here the cost of a group of products is ascertained. A group or batch of identical production units is taken as a cost unit. Batch costing s mainly used by engineering companies producing components or spare parts in economical batches.
Process Costing – Here manufacturing is carried out as a continuous process. It provides period approach. Cost during a period, departmentwise or processwise is determined.
The costing method of Buccaneers Limited can be referred to job costing and is given below:
The techniques of Cost calculation are:
Under this costing technique, costs are classified into two types – fixed costs and variable costs. Total of variable costs of a unit is called marginal cost. Fixed costs are recovered from contribution which is the excess of selling price over marginal cost.
Costing principles and or practices being uniformly followed by a number of undertakings under common control may be known as uniform costing. Different factories under one management use the same principles and or practice of costing so as to facilitate rational comparison of efficiency.
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